Code Red: Two Economists Examine the U.S. Healthcare System

October 5, 2011

Catching Up on Some Important Themes

Filed under: Uncategorized — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 10:42 am

Last night, one of my students showed me a new article by Harvard Business School’s Michael Porter that was published in the Harvard Business Review. Having embraced Porter’s work on competitive strategy as a foundation for teaching this important topic to MBA students, I grabbed the article with great anticipation. Porter covers a lot of territory in the article but I was struck by three major themes:

1) Hospital charges are not the same as hospital costs or hospital prices.
2) Hospitals need to do a better job of cost accounting.
3) Hospitals need to redesign their work flows to improve efficiency.

These themes are correct and Porter does a fine job explaining why they are important. But if anyone wants to learn about them in more detail, I suggest they look to the work done by faculty at another not-too-shabby business school. In 1991, the year I joined the Kellogg faculty, I published an article in Medical Care entitled “How Fast Are Hospital Prices Really Rising?” (My coauthors were my Kellogg colleague Mark Shanley and Will White who was at the University of Illinois.) The article made all the points that Porter made and then some, even documenting how reported medical price inflation, which was based on charges, was overstating the rate of inflation of actual prices. The consumer price index was soon revised to use actual prices rather than charges.

I learned about the myriad problems with hospital cost accounting when working on several cost benefits studies and I contributed a chapter describing the issues in the book Valuing Health Care, which was published in 1994. My Kellogg colleague Bala Balachandran hasn’t just been complaining about this problem. For the past 20 years, he has been helping hospitals adopt activity-based cost accounting.

I can forgive Porter for not citing the Dranove canon or about Balachandran’s “on the ground” efforts to change the system. But I am surprised that he ignored Steve Shortell’s work on process improvement. Shortell, currently the Dean of the UC Berkeley School of Public Health, is on the short list of “most prominent academics in the field of health management.” When Shortell was a Kellogg faculty member he published several papers, trade books and a textbook all around the theme of transforming medical care delivery. The redesign of care processes through continuous quality improvement is a constant theme in Shortell’s work.

I suppose we at the Kellogg school should thank Porter for his efforts. It is always nice when famous people acknowledge that the work that we have been doing for two decades

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